Tax cuts and family support at heart of race to replace Boris Johnson as UK PM

Tax cuts and aid for families struggling with the soaring cost of living are already at the heart of the political debate, and the pressures for largesse from the Treasury will only increase in the coming weeks.

By September, when the ruling Conservative Party aims to install a new leader, the government is likely to face strike threats from public sector workers demanding higher wages.

Increases in energy bills and rail fares will have been announced, and the Bank of England is expected to have raised interest rates by half a percentage point to combat the surge in the inflation, which has reached its highest level in 40 years.

“The immediate challenges are rising inflation and an economic slowdown,” said Gerard Lyons, chief economic strategist at Netwealth and a former adviser to Johnson. “This requires a tighter monetary policy and a looser fiscal policy.”

The candidates for the top job are Foreign Secretary Liz Truss, former Health Secretary Sajid Javid and Defense Secretary Ben Wallace. Each is likely to appeal to grassroots conservative members with a combination of tax cuts and spending increases.

They will also want to maintain the manifesto commitments left over from the 2019 election to “level” the less prosperous parts of the country outside of London that helped cause a landslide for Johnson.

All of this means that, more than a decade after the Tories came to power with promises to rein in government borrowing, discussions of austerity are unlikely to form a significant part of the candidates’ discourse.

“If we didn’t have this transitional situation, the argument would be fuel and energy tax cuts, a suspension of the corporate tax increase next year and help for households. via lower income tax,” Lyons said.

The political instinct to spend Treasury money contrasts with the central bank’s goal of tightening monetary policy in order to control inflation. Investors expect the BOE to raise rates quickly, offering more half-point increases by the end of the year on top of the August one.

Business leaders and the Treasury’s Office for Fiscal Responsibility have warned the Conservatives of a big splurge. The OBR said this week that the budget was on an “unsustainable” path, requiring tax increases and spending cuts for years.

Johnson’s legacy may well be a state that spends and taxes far more than conservative traditions suggest. Candidates are already collapsing to pledge to cut the UK’s tax burden, which ex-Chancellor Rishi Sunak has taken to the highest level since the 1940s.

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Tom Tugendhat, who is garnering support from MPs, wrote in the Daily Telegraph on Friday that “taxes are too high”. high growth economy. »

Nadhim Zahawi, the new chancellor who is a potential candidate, said “nothing is ruled out – I will be looking at all the ways we can support hard working families”.

He signaled he would scrap next year’s rise in corporation tax from 19% to 25% to ease the cost of doing business in a bid to boost lackluster economic growth and increase the temporary cut 5p fuel tax.

Other leaders, including Truss, have made it clear in the past that they support tax cuts. Even Sunak has tried to position himself as a conservative on tax cuts, although his record in power may prove a serious liability.

Jacob Rees-Mogg, the Brexit opportunities minister, said on Thursday that Sunak “was not a successful chancellor – he was a high-tax chancellor”.

Another option being considered is a temporary sales tax cut on the grounds that it would both reduce costs for households and mechanically reduce inflation. Before Johnson resigned, his office was reviewing the proposal.

“A lot of the math will be trying to select a candidate who appeals to a wide cross-selection of the electorate; including former Red Wall seats, as well as southern England and major cities,” said David Owen of Saltmarsh Economics.

“In terms of the likely policy mix, all of this further tilts the case for a looser fiscal stance and higher rates.”

Looser fiscal policy will come on top of the support provided during the coronavirus pandemic which has pushed public debt to a peacetime record. Sunak has already provided £37bn of support to households this year, including a £15bn package at the end of May only partially offset by a windfall tax on energy producers.

However, the weeks during which the leadership contest takes place will likely be peppered with calls for other giveaways. Public sector workers are demanding a pay settlement due in April, threatening a summer of strikes if no deal is reached. Government forecasts for 3% increases will not come close.

Nurses are asking for salary increases of 5% above inflation. Teachers are unhappy with offers of 9% for new entrants and 5% for existing staff. Lawyers rejected a 15% wage settlement. Like the railway workers, they are already on strike and are threatening new actions.

Although Johnson has said his caretaker government will not make any major budget decisions, new commitments may be inevitable. A 40% rise in energy bills and a potential double-digit rise in rail fares will be unveiled in August, alongside an interest rate hike from the Bank of England.

Candidates will inevitably have to address the questions, according to Citigroup economist Benjamin Nabarro. The backdrop, he said, “suggests competition dominated by the cost of living.”

Lyons said: “There needs to be a sea change in British economic thinking where the Treasury orthodoxy – that the UK is a structurally weak growth economy – is put back in its box. Fiscal conservatism and a growth agenda are neither. If you increase growth, you reduce debt to GDP.”

This story was published from a news feed with no text edits. Only the title has been changed.

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